For many centuries, money has been used to permit market transactions of goods and services. Money was often in the form of coinage and other types of currency and thus immediately liquid--and subject to immediate loss. To expand the available transactions, banks became available to extend credit for goods and services in the market. Such credit extensions were leveraged on deposits and took the form of various types of commercial paper including promissory notes, letters of credit, drafts and, more commonly, checks on account. These financial instruments have provided substantial capital and increased asset liquidity and thus supported greater--debt based--economic growth.
However, transactions based on paper have long suffered significant losses as a result of acts of fraud. Specifically, paper was easily stolen and modified in ways that misled the drawee bank into inappropriately releasing check defined currency. For the most part, this involved altering the check in a way undetectable to the bank. When presented for payment, the modified check would be honored with the resulting financial loss to be allocated between the drawee bank (bank of first deposit) and check writer of the funds usurped by the altered or fraudulently created check.
To combat this fraud, banks have employed many techniques for confirming check validity. For example, checks will routinely include information about the drawing account and amount to be drawn. Special patterns and designations are applied to the blank paper check stock to discourage replication. In fact, centuries ago, checks required a personal "chop" to permit cashing.
Notwithstanding these techniques, modern practices of check writing and encashment remains mired in scams and fraud, resulting in billions of dollars of lost funds and is growing at an alarming rate due to the use of technology such as image scanners, personal computers and laser printers. Moreover, banks and other institutions are responsible for cashing many pre-printed checks of the type now typically used for payroll, dividends, etc. These checks are computer generated by the check issuer with specialized accounting software to track the transactions on an aggregate basis and to record individual account activity. In some ways, these automated issuance systems make it easier for check forgers to alter or reproduce fraudulent checks. Banks also, in an effort to reduce the costs of processing presented checks and posting them to customer accounts, have implemented sophisticated equipment and software to greatly automate these processes. One of the unfortunate results of this automation, however, is that fewer customer checks are physically handled and reviewed by bank personnel, making it more likely that these reproductions of originally issued checks with altered payees will go undetected. Even when physically inspected, however, many of these falsified items so clearly match the appearance of an original check drawn on the same customer account that the counterfeit is still not detected. These types of fraudulent items are resulting in losses of approximately five billion dollars per year and are growing at an alarming rate.
As an example of this widespread type of check fraud, in 1993, two checks for $80,000.00 were stolen from the Philadelphia Post Office. These checks included a printed name identifying the payee on the check. In addition, these checks included information of the check number, account number and dollar amount. The fraud was perpetrated by creating a duplicate check in the same font/typeface on security paper with MICR (Magnetic Ink Character Recognition) encoding used by banks to read the key pieces of information about a check in an automated fashion. This was done so the copy was identical to the check stock that was initially issued. The sole difference from the original item was that the payee had been changed. An account had been opened in the fictitious payee's name and the duplicate check was deposited into the account. The duplicated check was presented for payment and the funds were transferred to the falsified account, which was then closed out after the deposit funds were withdrawn. Since the check number, account number and the amount were all accurate, and the check appeared to be the original, the check was honored and the fraud uncovered only after the funds had been removed from the fictitious payee's account.
The foregoing example is not a lone event. Similar schemes are being perpetrated by check fraud rings worldwide at an astounding rate. Computer generated paychecks for stock dividends, payrolls and similar automated check preparation systems are now used extensively throughout the U.S. to issue millions of checks each day. Each check must include the printed payee as discussed above, and thus each is subject to the same kind of potential fraud. To prevent this and other types of fraud, the present invention has been created.